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November 27, 2020 – An ad hoc group of term loan lenders claiming to hold a majority of amounts outstanding under the Debtors' November 2013 First Lien Loan Agreement (the “Ad Hoc Term Lender Group”) have filed an emergency motion to block the already Court approved $84.7mn sale of substantially all of the Debtors’ assets (“Sale”) to New TSI Holdings, Inc. ("New TSI") which had served as a stalking horse before being named as successful bidder in late October [Docket No. 710].
New TSI is an entity formed by prepetition lender Tacit Capital LLC (“Tacit”) and a group of further prepetition term lenders, including members of the Ad Hoc Term Lender Group, with Tacit to contribute the cash necessary to complete the Chapter 11 cases and then fund the Debtors' go-forward efforts with a $47.5mn cash contribution. The prepetition lenders were to contribute $80.0mn of prepetition debt in the form of a credit bid.
The Ad Hoc Term Lender Group claims that Tacit, unable to source its promised financing, has effectively withdrawn from the deal and ceded its role to "principals of 507 Capital and Peak Credit LLC (together, 'Peak'), who appear to have now effectively stepped in for Tacit." It further notes that Peak wants to push forward with completion of the sale and confirmation of the Debtors' Plan without out actually having been given the right to credit bid the $80.0mn of prepetition debt that is a critical element of the agreed purchase price; the majority of which is held by the Ad Hoc Term Lender Group, a position that gives them "the power to direct the Agent to exercise remedies, including to credit bid all or a portion of the loans outstanding under the Credit Agreement." As galling as Peak's presumption that it can credit bid debt with which it has no connection, is Peak's refusal to honor Tacit's role as provider of going concern financing without which the Debtors are "destined for a quick return to the bankruptcy court."
The motion continues as to the Ad Hoc Term Lender Group's sine qua non role in the asset sale, "As the credit bid was never contributed to the Buyer, the Buyer cannot meet the conditions for closing the Sale under the Asset Purchase Agreement."
The Ad Hoc Term Lender Group's motion [Docket No. 710] states, “Following a contentious opening to these chapter 11 cases, the Ad Hoc Term Lender Group has worked hand in hand with the Debtors to forge a smooth path to exit from bankruptcy that maximizes value for the benefit of all of the Debtors’ stakeholders. To achieve this, the parties, including the Debtors, the Ad Hoc Term Lender Group, Tacit Capital LLC ('Tacit'), and the official committee of unsecured creditors (the 'Committee') reached an overall deal that would provide adequate capital for the Debtors to bridge to a sale of substantially all of their assets to a newly formed entity (the 'Buyer') jointly owned by Tacit and the prepetition lenders ('Prepetition Lenders') under the Credit Agreement, including the Ad Hoc Term Lender Group. The new entity would also include takeback debt provided to both the debtor-in-possession lenders and the Prepetition Lenders as part of the consideration for the Prepetition Lenders’ contribution of their credit bid.
The parties worked cooperatively in reliance on this overall deal to document and effectuate the Sale process. In spite of this, principals of 507 Capital and Peak Credit LLC (together, 'Peak'), who appear to have now effectively stepped in for Tacit but who were not involved in negotiating the terms and mechanics of the Sale, are suddenly asserting, inconsistent with Peak’s own prior behavior and inconsistent with the agreement of the parties, the Sale Order, and the express terms of the Asset Purchase Agreement, dated as of October 26, 2020 (the 'Asset Purchase Agreement'), that the Sale can somehow be closed without the Buyer delivering the purchase price required under the Asset Purchase Agreement. The money to capitalize the Buyer is simply not there yet and Peak and the Debtors would like to force the parties to close into a Buyer that is destined for a quick return to the bankruptcy court.
Peak asserts that its minimal contribution of capital—only enough for the Debtors and the Buyers to close the Sale — is sufficient. But Peak has not committed a single dollar to fund the go-forward operations of the Buyer, offers no consideration to the Prepetition Lenders, and makes no effort to provide the key consideration under the Asset Purchase Agreement — the credit bid.
Peak’s position is not only incorrect, but it is illogical, inequitable, and contradicted by the plain terms of the Sale Order and the Asset Purchase Agreement. As part of the Sale, the Ad Hoc Term Lender Group agreed that its prepetition debt could be used as currency in the sale process. As the Ad Hoc Term Lender Group controls more than a majority of the loans outstanding under the Credit Agreement, it has the power to direct the Agent to exercise remedies, including to credit bid all or a portion of the loans outstanding under the Credit Agreement. This was the entire premise of the sale process — at the direction of the Ad Hoc Term Lender Group, the Agent would contribute $80 million of the loans under the Credit Agreement to the Buyer in exchange for an agreed amount of debt and equity issued by the Buyer. The parties specifically agreed to this structure and laid out explicit steps memorializing the same, including requiring as a condition to closing under the Asset Purchase Agreement that the Buyer provide the credit bid as part of the purchase price. As the credit bid was never contributed to the Buyer, the Buyer cannot meet the conditions for closing the Sale under the Asset Purchase Agreement.
Peak has only become involved in the Sale process earlier this month—and after entry of the Sale Order — when Tacit failed to obtain the funding required in order to close the Sale. Specifically, Tacit agreed in the initial global deal to capitalize the Buyer with a cash contribution of $47.5 million to ensure its viability as a go-forward entity. However, following agreement on the structure of the Sale and the entry of the Sale Order, Tacit’s conduct made clear that it would not be able to raise funds in order to make its agreed cash contribution into the Buyer or even fund the closing of the Sale. Tacit initially indicated that it would be able to partially raise the funds needed, but potentially not the full amount. Ultimately, Tacit disclosed that it would not be able to fund any of the cash contribution to the Buyer. By November 11, Tacit informed the Ad Hoc Term Lender Group that Peak was the only party able to provide funding just to close the Sale itself (a mere $5 million), with no go-forward capital committed to the Buyer.
In response to Tacit’s failure to raise funds for its cash contribution to the Buyer and Peak’s unwillingness to commit go-forward capital to the Buyer to ensure its viability, the Ad Hoc Term Lender Group and Peak discussed the consideration to be provided to the Prepetition Lenders, including the Ad Hoc Term Lender Group, at Sale close in exchange for the contribution to the Buyer of the loans under the Credit Agreement and the credit bid.
Peak’s position is fundamentally inconsistent with the entire premise of the Sale and the mechanics of how the consideration works thereunder. This Court should, therefore, temporarily enjoin the closing of the Sale until the Court can clarify the Sale Order for the benefit of all parties. First, there is a likelihood of success on the merits because the Asset Purchase Agreement is crystal clear that, as a condition to closing the Sale, the Buyer must deliver the purchase price thereunder, which includes the credit bid, as consideration to the Debtors. The Agent, the party with the right to credit bid on behalf of the Prepetition Lenders, has not contributed the credit bid or anything else to the Buyer, and there is no assertion to the contrary. The simple fact is that the Buyer does not now have, and never has had, any right or entitlement to credit bid the loans under the Credit Agreement. The Buyer holds no prepetition debt of the Debtors to even facilitate a credit bit. As a result, the conditions to closing the sale under the Asset Purchase Agreement cannot be met."
The bidding procedures motion [Docket No. 160] states, “The Debtors commenced these chapter 11 cases to implement a value-maximizing going-concern sale of their core operating assets, which will, among other benefits, preserve jobs for employees, tenants for landlords and a go-forward trade partner for vendors. As described in the motion seeking post-petition financing filed contemporaneously herewith, Tacit is providing the Debtors with post-petition debtor-in-possession financing (the ‘DIP Financing’) to fund these chapter 11 cases, including the sale process contemplated by this motion. In connection with the DIP Financing, Tacit is working with an ad hoc group of the Debtors’ prepetition term lenders (the ‘Ad Hoc Lender Group’) to submit the Stalking Horse Bid, which is a going-concern bid for the Debtors’ operations. The Stalking Horse Bid is a credit bid of the amounts outstanding under the Prepetition Facility, which credit bid the Ad Hoc Lender Group has agreed to cap at $80 million. Additionally, the Stalking Horse Bidder retains the right to credit bid amounts outstanding under the DIP Financing facility."
Key Terms of Stalking Horse Purchase Agreement
- Sellers: Town Sports International, LLC
- Buyer: An entity designated by Tacit and the Ad Hoc Lender Group
- Purchase Price: Total consideration consisting of (i) the assumption of the Assumed Liabilities, (ii) the credit bid in an amount then-outstanding under the Prepetition Senior Secured Debt, in an amount equal to $80.0mn (the “Credit Bid”), and (iii) the amount, paid in cash, equal to $1.0mn payable to general unsecured creditors; (iv) an amount, paid in cash (in an amount not to exceed $3.7mn), equal to the Cash Shortage to be used solely in connection with the Wind-Down (together, the “Purchase Price”); provided, however, that Buyer reserves the right to increase the Purchase Price, subject to the Bidding Procedures Order and applicable Law.
- Bid Protections: There is no break-up fee. The Initial Minimum Overbid Amount will be an amount equal to the sum of (i) one million dollars ($1.0mn) over and above the aggregate Purchase Price (as defined in the Stalking Horse Purchase Agreement) plus (ii) the DIP Obligations outstanding.
In a declaration filed in support of the Bidding Procedures Motion, Christopher A. Wilson, Managing Director in the Technology, Media & Telecom Group at the Debtors’ financial adviser Houlihan Lokey Capital, Inc., said Tacit, in collaboration with the ad hoc lender group, submitted a proposal for $5.0mn in DIP financing on August 20, 2020. After the Debtors informed Tacit that the proposed DIP sizing would not be enough to meet its liquidity needs, negotiations continued, resulting in the DIP size being increased to $15.0mn, $17.5mn, $30.0mn and, ultimately, $32.0mn. The final DIP Facility proposal was coupled with the going concern Credit Bid for substantially all of the Debtors’ assets.
Since the Petition Date, the Debtors have been actively pursuing a going-concern sale with all interested parties. The Debtors have contacted more than 40 potential bidders with written marketing materials, including 17 strategic companies in the fitness space and a range of distressed and private equity investors focused on multi-location concepts, health and wellness or other concepts related the Debtors’ business. Some of the contacted entities have either not shown interest in the Debtors’ assets or have otherwise indicated that they are not in a financial position to move forward with the sale process at this time. Moreover, the Debtors have received various additional inbound inquiries post-petition from potential going-concern buyers. To date, the Debtors have had various levels of contact and attendant discussions with nearly 50 potential bidders.
The Debtors, with the support of their advisors, intend to continue fully marketing the Debtors’ assets to determine whether there are any financially more advantageous alternatives to the Stalking Horse Bid, recognizing the Debtors precarious liquidity position and the market challenges facing the fitness industry."
About the Debtors
According to the Debtors: “Town Sports International Holdings, Inc. (the ‘Company’ or ‘TSI’), is a diversified holding company with subsidiaries engaged in a number of business and investment activities. The Company’s largest operating subsidiary, TSI, LLC, has been involved in the fitness industry since 1973 and has grown to become one of the largest owners and operators of fitness clubs in the Northeast region of the United States. TSI’s corporate structure provides flexibility to make investments across a broad spectrum of industries in order to create long-term value for shareholders. Town Sports International is led by its Chief Executive Officer and Chairman of the Board, Patrick Walsh.”
As of December 31, 2019, the Debtors owned and operated 186 fitness clubs and collectively served approximately 605,000 members.
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